ANNUAL REPORT AND FINANCIAL STATEMENTS 2011 | 71
15. Acquisition of subsidiaries continued The following adjustments were made to the book values of the assets and liabilities acquired:
• The key accounting policy alignment adjustments relate to the recognition of deferred income and deferred acquisition costs, together with associated tax adjustments, in accordance with IFRS requirements adopted by the F&C Group;
• An intangible asset of £23.0m, together with an associated deferred tax liability of £6.4m, has been recognised on acquisition, being the fair value of the management contracts acquired with TRC. Further details of intangible assets are given in note 13; and
• Fair value adjustments include:
– the recognition of an investment of £0.8m, being the fair value of F&C Ordinary Shares acquired with TRC, which relate to employee benefit arrangements. On consolidation, this investment has been transferred to equity as the shares are required to be accounted for as ‘own shares’;
– a reduction of £0.3m to the initial estimate of employee benefits included in the Completion Accounts; and – the tax effect of pre-tax adjustments.
The adjustments noted above reflect the Directors’ best estimate of the necessary fair value adjustments to the net assets of the acquired entities as at 31 December 2010.
As at 31 December 2010, the fair values of identifiable assets acquired and liabilities assumed are considered by the Directors to be provisional. Any subsequent amendments to the fair values will be made after the TRC Completion Accounts review process has been completed.
No provisions for reorganisation or restructuring costs were included in the liabilities of the acquired entities. The net revenues and loss before tax attributable to the TRC Group for the four-month period between the date of acquisition and 31 December 2010 were £14.6m and £3.7m respectively. On an underlying basis excluding the Commutation expense and the costs associated with the TRC Management Retention and Incentive Plans, the pre-tax result was a profit of £2.8m.
As a pre-condition of the acquisition agreements, a group restructuring involving the entities being acquired by the F&C Group was completed in advance of the acquisition. This restructuring was required as the Group was not acquiring Nevsky Holdings Limited or TRC UK’s interest in Nevsky Capital LLP, as outlined in the Circular issued to shareholders in respect of this transaction. As a result, the pre-acquisition results of the acquired entities would have differed materially from the post-acquisition results of TRC entities included within the F&C Group results. Therefore, it is not considered possible to determine what the F&C Group results would have been had the acquisition completed on 1 January 2010.
The value of goodwill arising on acquisition includes the value of the investment management teams acquired and the value of future business flows that the distribution capability of TRC is expected to generate. No tax deduction is expected to be available in respect of the goodwill arising on acquisition.
Commutation arrangements The Divisional Members of Investment Teams have entered into put and call options which, if exercised, will transfer value to F&C by way of variation of the entitlements to the allocation of management fee profits (as defined in the underlying legal agreements) and capital profits in the respective LLP. The exercise of these options will increase TRC UK’s share of the management fee profits of the respective Investment Teams by up to 20%.
These options are exercisable:
• 18 months after Completion: At the option of the Investment Teams, TRC UK will purchase an additional 10% of the management fee profits of each Investment Team. The option for Investment Teams to exercise this put option is conditional on that team’s respective net fund flows being positive for the twelve months preceding the option exercise period.
• 36 months after Completion: FCAM has a call option to purchase, through TRC UK, an additional 20% of the management fee profits of each of the Investment Teams. The level of 20% is reduced by the percentage of any profits which have already been commuted at an earlier date.
The 18/36 months options to acquire such management fee profits may be deferred for a period of twelve months if the F&C EBITDA Multiple, which is one of the components used to quantify the Commutation consideration, is less than five.
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